Your wallet's days are numbered thanks to devices loaded with near-field communications

Everyone has watched demand for physical books, music albums and movies wane for years as consumers found eBooks, MP3s and Internet videos to be cheaper and more conveniently accessible digital alternatives.

Pretty soon, the same will be said for your old leather friend — the wallet — and pretty much everything in it.

Near-field communications (NFC) is the technology that will bring about the digital replacement of the centuries-old wallet, starting this year. By securely embedding all the information now found in the plethora of cards, cash and identification in a typical wallet directly onto a smartphone, NFC will eventually reduce the physical wallet to the status of historical relic.

“The whole ecosystem and the road map for NFC where it relates to payment is that very soon you’ll get the kind of digital wallet where you can store your loyalty cards and the points that you accumulate will be automatically transferred the moment you make a purchase,” said Nitesh Patel, senior analyst for the global wireless practice of Strategy Analytics.

Similar to the way credit and debit cards embedded with “smart chips” work today, NFC chips release payment or ID data when in contact with a compatible receiver. The difference is that unlike “smart chips,” NFC chips needn’t be attached to a tactile product of a given shape — such as a rectangular credit card — because they transmit data wirelessly over short distances.

That means NFC chips, loaded with everything one might need in a wallet, can be embedded directly within a smartphone. Widespread availability of NFC-enabled smartphones has been the only thing keeping the digital wallet from rising sooner.

But now, NFC chips are widely expected to be nestled at the core of the next generation of devices from leading mobile players like Apple Inc. and Research In Motion Ltd.

“We’ve been waiting for something to happen as an industry in Canada for many, many years,” said Drazen Lalovic, vice-president of wireless market planning for Telus Corp. “Finally I would say now we are hitting that inflection point.”

Credit card companies like Visa and MasterCard have already been working on more limited contact-free payment methods using NFC for years and some — like Mastercard’s PayPass feature — have proven to be quite popular among consumers.

MasterCard is already conducting trials to introduce a mobile app version of PayPass for NFC phones, which would eliminate the need to carry a credit card at all. Many major rewards providers — like the Starbucks Rewards program — already offer digital replacements for their physical cards in the form of mobile apps.

That just leaves debit cards, ID and petty cash inside the physical wallet; and they are next up on the digitization block.

Interac, Canada’s largest processor of debit purchases, has been preparing for the shift to NFC since 2009. It’s first contactless product — called Interac Flash — will provide a function similar to that of MasterCard’s PayPass by allowing cardholders to tap their debit cards against a terminal to complete a purchase.

“NFC will become a mainstream payment method,” said Allen Wright, vice-president of product with the Interac Association. “These things take a fair amount of time, but anytime you can bring a bunch of factors together such as convenience, utility, acceptance and security; if you can get those things together at the same point in time and deliver them to the consumer, it is almost like why wouldn’t they use it?”

With the first Interac Flash-capable cards expected to become available to Bank of Nova Scotia and Royal Bank of Canada customers this summer, the payment provider has no intention of stopping there. Flash is the first stage in a much longer process, Mr. Wright explained.

“The second stage will be to take Flash and incorporate it into the mobile phone device, which is the NFC function,” he said.

The target is to have a pilot program in place by next year. Once NFC phones reach a “critical mass” in the market, which Mr. Wright expects will happen in the next few years, Interac will be able to follow suit “within a three-to-five-year window.”

As one of Canada’s largest wireless carriers, Telus has also been working for years in tandem with financial institutions and other carriers to ensure its network can support what could quickly become millions of purchases made daily with a wireless device.

“We started seeing a few phones with cameras, then many phones with cameras, now every single phone has a camera,” Mr. Lalovic said, comparing the rise of the smartphone camera to the smartphone wallet. “We should expect to see the same pattern with NFC capabilities on phones, but even more accelerated.”

Meanwhile, the use of cash has been in rapid decline as consumers display an open preference for various electronic alternatives. The number of point-of-sale (POS) transactions made in Canada using debit cards in place of cash has been growing steadily since 2005, according to data from the Canadian Bankers Association.

That comes as no surprise to Mr. Patel of Strategy Analytics.

“There is already a trend away from handling cash,” he said. “[The amount of cash that people carry on average] has been low and has continued to fall quite a lot over the last two to three years.”

Ending any possible doubt that the way Canadians pay is in a state of dramatic transformation, federal Minister of Finance Jim Flaherty established a payment task force last June to ensure regulations keep pace with the changes.

“Today, Canadians can pay for things in a bewildering number of ways, even by tapping a cellphone against a scanner,” Mr. Flaherty told an industry conference in Vancouver on June 18, 2010.

The physical wallet will never completely disappear. Just as with printed books and newspapers, many people will still prefer the tactile experience of a currency holder over the convenience of a digital alternative.

Those arguments will subside with the passage of time, Mr. Patel argues.

“I’ve always believed that people place strong value on physical media such as CDs and DVDs, but it has become abundantly clear that the younger age groups are quite happy to have things in digital format only,” he said

“That wave of youngsters is where we could eventually see the phasing out of things like wallets in the much longer term.”

As credit, debit and rewards cards all fall by the digital wayside, one final vestige of the physical wallet remains: government-issued identification.

Yet even that is adapting to the digital times. It has been nearly two years since Ontario first introduced a new form of driver’s licence with radio frequency identification (RFID) technology — virtually identical to NFC — directly embedded in the licence to allow for wireless scanning.

While that is still just an enhanced version of a physical card, it would seem to only be a matter of time before the embedded information becomes transferable.

Once that happens, pulling a plastic card out of a leather billfold at a cash register will look as antiquated as an abacus.